A changing landscape for growing copper producers

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2013-03-20

VANCOUVER — With the US$5.1-billion hostile takeover of Toronto-based Inmet Mining (IMN-T) by large-cap peer First Quantum Minerals (FM-T, FQM-L) looking all but wrapped up, it seems an opportune time to take a look at the shifting merger-and-acquisition landscape for mid-tier copper producers, and try to earmark just which companies might be making moves over the next few years.

The current climate is particularly interesting for a number of reasons. Firstly, the recent rash of write downs plaguing major producers has generated an appetite for capital savings and financial prudence, which means big-time players like Anglo American (AAL-L) and BHP Billiton (BHP-N, BLT-L) could be looking to shed relatively fringe assets in a bid to pump up balance sheets. Though these assets are on the margins for mega companies, many would represent solid growth option for mid-tier producers.

A second consideration stems from the recent recession that has seen many miners hitting historic lows vis-a-vis share and capital valuations. First Quantum discovered that market machinations can leave a company like Inmet open to a hostile acquisition at a lower-than-anticipated price. The effect has been even more acute at the junior level, where many small-cap companies are teetering on the brink of extinction due to weak equity markets and lack of available capital.

Finally, the long-term outlook on copper remains predominantly bullish despite a mid-term volatility in prices stemming from underperformances in major industrial economies like China, the U.S., and the European Union.

Over the past twelve months copper prices have moved in a variance bracket of roughly plus-or-minus 10.6% — from a high of US$3.96 per lb. to a low of US$3.23 per lb. — which seems a likely price range for the red metal to occupy over the mid-term. And at those prices copper has proven to be a profitable commodity for miners with strong operational pedigrees and an ability to meet guidance estimates.

One such proven operator is Vancouver-based Capstone Mining (CS-T), which continues to produce strong results at its Cozamin polymetallic mine in Zacatecas, Mexico, as well as the Minto copper-gold mine in the Yukon. The company also has a promising growth pipeline with its US$1.6 billion Santo Domingo copper-iron-gold joint venture in Chile.

Capstone has been in the acquisition conversation for around a year, and boasts a strong balance sheet with US$500 million in treasury, plus cash flows from operations, and no capital outlays at Santo Domingo until 2015. During a conference call on March 14 president and CEO Darren Pylot explained that Capstone had suspended a recent share buy-back program to preserve capital as acquisition talks heat up.

“I’m sure you have heard in the market — and you have heard every major mining company CEO stand up and say it over the last six months — that they’re going to be preserving capital and selling non-core assets. So we believe there’s going to be a number of additional non-core assets from the majors that could become available,” Pylot continued, adding that Capstone was looking to acquire specific assets as opposed to an entire company.

“There’s been quite a few over the past four or five months. And as I said, we are engaged in some of those, and we actually expect to see a fair amount coming up over the balance of 2013. As I mentioned, we’re being very disciplined with our capital. We’re not going to reach or overstretch our balance sheet to make an acquisition because we do believe there’ll be more coming — this is just sort of the beginning of it,” he concluded.

A larger base metal producer that has not been shy about voicing its pursuit of copper assets has been Toronto-based Lundin Mining (LUN-T). The company is expecting to produce between 100,000 and 108,000 tonnes contained copper in 2013 at cash costs of roughly US$1.03 per lb., and had a cash position of around US$275 million to end 2012.

During a conference call in late February president and CEO Paul Conibear outlined Lundin's growth strategy, noting that the company was looking at projects in various stages and would not discount smaller-scale acquisitions.

"I would like ultimately to add more copper into our portfolio for the future. We really like copper. We’ve got a great portfolio already of zinc and polymetallics to be expanded in the future. We’ll be opportunistic if we see a good deal," Conibear explained, also noting that Lundin would be looking at assets put up for sale by majors.

"I wouldn’t want to put any particular size on it. I mean we’re looking at lots of junior opportunities as well, three or four of those would be great to add to our stable this year,” he concluded, outlining smaller investments in the US$2 million to US$10 million range that could lead to incremental growth.

Conibear explained that Lundin would be focusing on mines that were producing between 30,000 to 80,000 tonnes of contained copper per year, and hosted reserves that would support a mine life in excess of 10 years.

B.C.-focused producer Taseko Mines (TKO-T, TGB-X) has also been viewed as a potential player in the merger-and-acquisition space. The company runs Canada's second-largest, open-pit copper-molybdenum mine at its 75%-owned Gibraltar operation in the Cariboo region, which produced 89.7 million lbs. of copper and 1.3 million lbs. of moly in 2012.

Taseko is currently focused on its internal growth profile via its US$1.1-billion New Prosperity copper-gold project 125 km southwest of Williams Lake, B.C., but the company could prove to be an acquisition target or potential acquirer moving forward.

Taseko has been wrestling with ongoing Federal permitting issues at New Prosperity, but the project boasts a 32-year mine life based on proven and probable reserves of 831 million tonnes grading 0.23% copper and 0.41 gram gold per tonne.

In early November Taseko bumped its equity position to 16.8% in junior Yellowhead Mining (YMI-V) and its Harper Creek copper-gold-silver project 150 km north of Kamloops. Harper Creek is a low-grade volcanogenic sulphide system that contains reserves of 704.4 million tonnes grading 0.26% copper, 0.03 gram gold per tonne and 1.14 grams silver per tonne.

On the acquisition side of the ledger two Vancouver-based producers stand out as potential targets. Both Copper Mountain Mining (CUM-T) and Mercator Minerals (ML-T) boast assets that could draw interest from mid-tier outfits looking to boost copper production.

Copper Mountain would be the more expensive option with a $282 million market capitalization, and operates its 75%-owned Copper Mountain Mine 20km south of Princeton. The mine produced 57 million lbs. of copper and 19,000 oz. of gold in 2012 at total cash costs of US$2.32 per lb., though processing difficulties meant Copper Mountain ended the year with 82% mill availability, and the company saw its working capital drop 38% year-on-year to C$24.3 million.

Mercator has struggled to get a handle on operations at its historic Mineral Park copper-moly mine 120 km southeast of Las Vegas, Nevada, though the company did report record production in 2012 with 87.5 million lbs. of copper equivalent. Mercator is aiming to continue improve operations with its 2013 guidance at Mineral Park clocking in at between 93 and 102 million lbs. of copper equivalent at cash costs of ranging from US$2.25 to US$2.50 per lb. At the end of the third quarter Mercator reported US$11.3 million in cash and equivalents, along with a working capital deficiency of US$63.8 million.

Mercator could be viewed as a relatively cheap acquisition with a C$118 million market capitalization, and offers an intriguing growth profile courtesy of its wholly-owned El Pilar copper project in Sonora, Mexico. The US$280 million project would produce 79.3 million lbs. of copper cathode over a 13-year mine life, and boasts a US$416 million after-tax net present value and 36.6% internal rate of return at an 8% discount rate.

Looking a bit further down the road it is hard not to notice B.C.-centric producer Imperial Metals (III-T) and its world-class Red Chris copper-gold development 80 km south of Dease Lake. Imperial exceeded its guidance at its Mount Polley and Huckleberry mines in 2012, producing 51.3 million lbs. of copper, 53,500 oz. of gold, and 212,000 oz. of silver.

The company is basically acquisition proof due to its tightly held equity structure — Canadian billionaire Murray Edwards controls roughly 39% of its outstanding shares — but assuming Red Chris stays near its US$444-million development budget Imperial could be a big player down the road.

Red Chris remains on schedule for plant start-up in 2014, though the company will require additional financing by mid-2013, and boasts proven-and-probable reserves totalling 302 million tonnes grading 0.359% copper and 0.274 gram gold. At current reserve levels Red Chris features a 28-year mine life at a 30,000-tonnes-per-day throughput rate.

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